Borrower profile: Capital Square looks ahead to 2023 lending reboot  

Capital Square, a Richmond, Virginia-based multifamily manager, was on pace for a record year when transaction activity sputtered to a halt a month or so ago as lending dried up. But Louis Rogers, founder and co-CEO, believes there will be more stability in 2023, which will allow lenders to get back into the market.  

“It feels like the best of times and the worst of times. On the one hand, there is a gulf between the bid and the ask between buyers and sellers, and there is similar uncertainty on the financing side,” Rogers said. “On the one hand, you think the world is ending but on the other hand, there is still demand for the very best assets.” 

In Capital Square’s experience, the best assets in the best markets are still commanding strong prices that are a bit off the peak, while other properties are sitting on the market.  

“We used to use the expression ‘catch a falling knife,’ but I don’t think we can in this circumstance because multifamily assets are performing,” Rogers said. “We have a portfolio of 15,000 units that are 99 percent to 100 percent leased and saw rent collected through a global pandemic. Therefore, we are saying we’re not catching a falling knife, we are catching a business plan that is working like magic.” 

Financing, however, has presented a challenge – the firm has found many lenders of all stripes have pulled back. This means Capital Square has looked for situations in which it can assume loans, a strategy Rogers says the firm has followed for many years.  

Loan assumptions are not a one-size-fits all – Rogers noted it is only possible with GSE-sponsored debt, as well as some insurance companies. There are additional factors to consider, including the remaining term on a loan. “Loan assumption is an excellent way to work right now, but it doesn’t work in all cases,” he added.  

The firm has a portfolio of more than $5 billion of assets, with acquisitions and developments in Tennessee, Georgia, Virginia, North Carolina, and other high-growth markets. Capital Square raised more than $1 billion of capital this year and deployed significantly greater amount than that in acquisitions, with additional initiatives that included rolling out a new unit that will focus on single-family build-for-rent homes, Rogers said. 

Since inception in 2012, Capital Square has focused on some of the more esoteric parts of the market, including working via Delaware Statutory Trust and 1031 Exchanges and Qualified Opportunity Zones. Capital Square’s plan going forward is to increase its ability to work with residents in all cycles of life, from student housing to senior housing.  

Rogers believes the market will begin transacting again in 2023, reiterating that pricing is unlikely to change for the best assets.  

“There are billions of dollars sitting on the sidelines and you can’t just sit on cash,” he said. “Next year, when that money comes out, it is going to buy Class A assets and other, different classes of housing. It won’t happen this year because it seems that lenders have hit their lending quotas for the year.

“But lending will return next year, leverage levels will get a little better and by the middle of next year I’m expecting that it will be fairly normalized, and we will have a new paradigm.”